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Investment Thesis

MongoDB, Inc. (NASDAQ:MDB) delivered a stellar Q2 earnings report. A truly impressive report with not only a massive beat on the top line and bottom line, but also, its guidance, particularly on its bottom line, sizzles.

And yet, despite being bullish this name, I haven’t shied away from asking difficult questions here. Questions, that admittedly, I don’t know the answers to.

In summary, I highlight that MongoDB’s multiple is far from the bargain basement. And that, in actuality, investor expectations heading into this report had already been very strong.

Whilst I remain bullish this name, I haven’t avoided highlighting some pesky detractions to the bull case that investors should think about.

Understanding Atlas Vs. Non-Atlas

Atlas is MongoDB’s cloud business. The reason why the stock delivered such a strong performance in Q2 wasn’t as much driven by MongoDB’s cloud business, Atlas, as much as it was MongoDB’s legacy business.

Note, the whole growth narrative for MongoDB had been its Atlas business. That’s why investors were paying a premium for the stock.

On this note, this is what MongoDB’s management stated on the call (emphasis added):

[…] we expect to see a significant sequential decline in non-Atlas revenues in Q3 as we simply do expect similar new business activity, especially when it comes to licensing deals. For that particular line of business, Q2 was just an extreme positive outlier.

Third, we’re raising our non-Atlas revenue estimate for the rest of the year, even though we don’t expect our exceptional Q2 performance to repeat in the second half, our results in the first half give us incremental confidence in our run anywhere strategy. We continue to expect, however, that the difficult compare in the back half of the year will impact our non-Atlas growth rate.

And then, further into the earnings call, in the Q&A section, MongoDB’s COO & CFO Michael Gorden said,

[…] And so, yes, I think that this is not repeatable performance, and I think it [non-Atlas business] should settle back down to a more — to a lower and more normalized level.

With this context in mind, we have a lot to discuss with regards to MongoDB’s future growth rates.

This Guidance Brings Up Questions

MongoDB upwards-revised its revenue growth rates for the year. Slightly. Given its fiscal Q2 2024 very high single-digit top line beat, the first question we must now address is this: exactly how conservative is MongoDB with its guidance ahead?

Close followers of this name will know that MongoDB has a recurring habit of pointing towards very poor guides for the quarters ahead, only to subsequently positively surprise the investment community. As a reference point, see the table that follows.

As you can see above, it’s not only the latest quarter that saw a very strong beat of nearly double digits against revenue estimates. It’s been a consistent practice that MongoDB puts out lackluster guidance, only to beat against that low bar.

That being said, even if we were to presume that MongoDB is aiming to sandbag its next quarter’s results; and its revenues for the next quarter end up by 32% y/y, this would still be a significant deceleration from the 40% CAGR just reported. And that’s not great.

Next, one final question surfaces. Notice that Q3 should be up against easier comparables than Q2 2024 was up against. One way or another, I would have expected to see MongoDB guiding for the high 20s CAGR for its upcoming next quarter, rather than the low 20s CAGR it has guided for.

Why am I putting so much emphasis on the next quarter’s results? When investing in a growth company, the single most important consideration is investors’ confidence level over a company’s growth rates. From that point, there’s an alignment of investors’ expectations.

Yes, we all want to be long-term buy and hold forever investors. But when expectations are high, the company must deliver against those expectations. Because in this market, any slight mishap, and your stock gets crushed.

Investors Expectations in Focus

Above we can see something that investors may not be fully aware of. We see that MongoDB’s share price has soared on the back of an increase in risk-appetite.

More specifically, we can see that since the start of the year MongoDB’s forward multiple was just over 8x and now it’s around 17x forward sales. Think about this! What we’ve seen is MongoDB’s multiple expanding about 100%.

So again, I ask yet another uncomfortable question: what’s next?

Can investors today truly hope to see MongoDB’s multiple expanding a lot further? And what’s an appropriate multiple? Is 20x forward sales a fair multiple? Perhaps 25x forward sales? Obviously, a lot depends on where the Fed cuts rates to in 2024. And that’s a tough game.

The Bottom Line

Despite MongoDB, Inc.’s impressive financial report, I must admit to feeling uncertain and doubtful about the future. While the company delivered exceptional results in Q2, questions linger in my mind.

MongoDB’s multiple doesn’t reflect a bargain, and the market had already set high expectations. The growth narrative focused on MongoDB’s cloud business, Atlas, but Q2’s success was driven more by the legacy business.

MongoDB’s management anticipates a significant decline in non-Atlas revenues in Q3, suggesting the exceptional Q2 performance won’t repeat. Still, they express confidence in their “run anywhere” strategy.

The guidance raises questions about MongoDB’s conservatism in forecasting. The company often underestimates its performance, and while this Q2 was strong, a significant deceleration is expected. The market’s expectations are now high, and any misstep could lead to a stock decline.

Additionally, MongoDB’s forward multiple has doubled in 2023, leaving uncertainty about further expansion and what constitutes a fair multiple. Even though I’m bullish this name, I recognize that the game ahead is indeed tough.

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